Risk-on mood recedes as credit fears surface

More sustained USD losses, Scotiabank

Investors were uneasy even before central banks around the world were able to control inflationary pressures due to a possible spread of the US and European banking crisis.

In fact, a systemic credit risk is currently the top tail risk for the markets, according to the BofA March Global Fund Manager Survey. As a result, increased inflation has dropped to the second-most important concern. Economic concerns continue. According to the poll data, investor sentiment is nearly at the levels of pessimism witnessed at recent 20-year lows. As a result, net 41% of respondents—up from 32% in February—are currently assuming lower-than-average amounts of risk.

This unwillingness to take risks is understandable given the possibility of crisis spillover. It’s interesting to note that the ongoing banking problems are regarded as distinct from the global financial crisis because they don’t involve solvency or bad debt. Today’s issue is more a result of excessive interest rates than it is of poor debt. According to a Nuvama Research report dated March 21, “core banking and private sector balance sheets in the western world are healthy, hence restricting the extent of crisis.” Although the macro backdrop is muted, there are still other elements that could ruin the fun. “The growth environment is really unfavourable. Housing markets, the money supply, and the global PMI (Purchasing Managers’ Index) are all far worse now than they were in the past. The research added that the US fiscal firepower and China’s monetary muscle are both weaker this time, which “may lead to a worse economic catastrophe if allowed unchecked.”

In light of this, the US Federal Reserve’s decision on interest rates and remarks on how it intends to handle the stress in the banking sector are essential. The banking crisis has made a precarious situation for the Fed that was already difficult. Note that the two-day Fed meeting scheduled for March 21–22 was already underway at the time this story was being written.

Despite the outcome of the Fed meeting, Deepak Jasani, head of retail research at HDFC Securities Ltd., predicted that equities investors’ risk appetite would not quickly increase. “There are still concerns about the second order effects of the Fed’s extended tightening cycle on the global economy,” he continued.

Potential profit downgrades are a concern for stock market investors in Indian companies. One of the finest lead indicators for Nifty profits is Global M1 (given the strong global interlinkages). It implies that the Nifty earnings have sharply moderated. The average estimate of 18–20% earnings growth for (FY24) may be disappointed as a result, according to the Nuvama research.

Stock market returns that are muted reflect these worries. The Nifty 50 and BSE Sensex have declined by 1.71% and 2%, respectively, so far in March. With Indian markets trading at somewhat lower one-year forward valuation multiples, valuations have stabilised. That’s not very consoling, though. According to Bloomberg data, the MSCI India index’s price-to-earnings multiple of 16.6 times is higher than that of the MSCI Asia Ex-Japan and MSCI Emerging Markets indices. Aside from the turbulence in the world, internal levers like strong urban consumption and systemic liquidity excess are declining. However, rural recovery has not yet picked up speed and could be adversely affected by this year’s potential El Nio.

For the next six months at least, we won’t be taking a lot of risks “said Nitin Bhasin, head of research and co-head institutional equities at Ambit Capital. On the macro front, he said, there are difficulties; income levels are not increasing; job creation is meagre; and the outlook for general consumption is dismal. “Because this is an election year, the government must balance its economic demands with its political obligations, “He was cautious.

All things considered, stock investors might expect a difficult journey ahead.